Yahoo Finance FDM Group (Holdings) PLC (LON:FDM): Cash Is King
FDM Group (Holdings) PLC (LON:FDM) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I’ve analysed below, the health and outlook of FDM’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
Check out our latest analysis for FDM Group (Holdings)
Is FDM Group (Holdings) generating enough cash?
FDM Group (Holdings)’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for FDM Group (Holdings) to continue to grow, or at least, maintain its current operations.
The two ways to assess whether FDM Group (Holdings)’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
FDM Group (Holdings)’s yield of 2.95% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on FDM Group (Holdings) but are not being adequately rewarded for doing so.
Is FDM Group (Holdings)’s yield sustainable?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at FDM’s expected operating cash flows. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 46%, ramping up from its current levels of UK£34m to UK£49m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, FDM’s operating cash flow growth is expected to decline from a rate of 34% next year, to 8.4% in the following year. But the overall future outlook seems buoyant if FDM can maintain its levels of capital expenditure as well.
Next Steps:
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto FDM Group (Holdings) relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research FDM Group (Holdings) to get a better picture of the company by looking at:
Valuation: What is FDM worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether FDM is currently mispriced by the market.
Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on FDM Group (Holdings)’s board and the CEO’s back ground.
Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
